With the dust hopefully having settled here, it finally seemed like the right time to give this post one last polish & get it out! Maybe now, readers are in the mood again to actually contemplate a potential new buy or two? As for me, almost inevitably, my top holdings tend to be my favourite buys…

Okay, maybe that’s not strictly true – each & every day, I’m still distracted by siren stocks I pine to own! But buying a new stock is equally about selling an existing holding*, one you (should) already know far more intimately. [*Unless you’re hoarding piles of cash…which would be pretty silly, right?!] And that’s an important & valuable hurdle for any investor. Because anything that might help reduce portfolio turnover is invariably a good thing! Which is no damn excuse for hanging on to losers…but it is a compelling incentive for really understanding the stocks/businesses you currently own. In particular, because learning how not to sell potential multi-bagger growth stocks is ultimately the biggest challenge most (experienced) investors will have to face, as I lamented in my last post.

So let’s crack on: For each of my disclosed holdings, I’ll comment briefly on its 2017 performance, then focus on its current prospects & valuation. NB: All share prices & market caps are cob Feb-27th, but individual stock allocations are listed as of year-end 2017 (essential to my 2018 portfolio performance tracking). Of course, any questions/comments you may have about these holdings are always welcome here (& by email):

Yeah, unfortunately they can’t all be potential multi-bagger growth stocks…

Zamano’s a bad romance which, almost inevitably, kept getting worse – a good awful reminder stop losses are something all value investors should actively consider…but alas, almost never do. In fact, value purists will argue fervently against them, while ducking the question any trader would ask: ‘If you’re so damn smart, how come you’re losing so much money?!’. I was wrong here to hold out for my fair value estimate (which proved more theory than fact), wrong to hold out for a takeover offer that never quite materialised, wrong to assume the board & major shareholders could still reliably line up an exit & extract value before it evaporated. But in the end, the real blame lies squarely with Zamano’s executive management – they failed to deliver a single acquisition, they failed to deliver on any new business/growth initiatives (like direct carrier billing), they had zero skin in the game to ensure a takeover offer actually made it over the finish line, they presided over the implosion of the company’s business, and then they ended up actually getting paid to walk away with the dregs!?

The end-game here (i.e. a wind-down) was announced over a year ago…and yet, we still await the cash!? No surprise really, the shares puked out another (25)% decline last year. But at this point, I remain grimly invested, as ZMNO’s de-listing draws near: The London listing terminates in early-March, so we can expect an announcement shortly…and it’s only fair AIM shareholders have a final plan/schedule in front of them ahead of the de-listing. But noting its tiny market cap, potential upside from monetising the Dublin listing (which has another 6 months to run) is compelling, so I suspect the board will continue to pursue that option (even if the odds of success are slim). Therefore, the key decision in the next week or so is whether they announce an imminent return of capital, or hang on to it for another 6 months as a possible component of a potential reverse merger deal. But by default, shareholders can expect a (tax-efficient) payout sooner or later this year of Zamano’s €5.3 million residual cash (or maybe €5.2 million, assuming another half year of cash shell expense).

So that’s an expected 30%+ gain vs. the current €4.0 million market cap, with a (small) possibility of benefiting from a monetisation of the listing itself. Wow, Zamano might finally be an excellent event-driven investment here!? But hey, I’ll leave that for each of you to decide…

Does that seem churlish after a tender offer-induced +50% gain last year!? Maybe, but it does feel like shareholders are back to square one here again. Granted, a 29% surge in AUM to $1,235 million in the H1-2017 interims is encouraging…maybe Rasmala’s finally found its groove in (logistics-focused) property investment & can really start to execute/repeat/accelerate/scale up AUM here (property’s inherent leverage potential obviously helps). But while an (aggressive) growth trajectory would improve what’s now a marginally loss-making business, I’m still not convinced it can deliver a decent return on equity – a perspective (see i) here) the CEO would disagree with vehemently, even though he’s never refuted or countered it with me (or shareholders). On the other hand, he has ultimately delivered since on all the major proposals I set out in that same letter to the board!

Fortunately, the last tender flushed out more sellers & delivered huge NAV accretion – I calculate NAV jumped almost 50%, from an end-June 280p per share to a post-tender 417p per share. For a MENA-focused asset manager with a strong balance sheet, a 0.35 Price/Book multiple is ridiculously cheap. [Though 25% of net equity is now intangible…but this implies a $21 million potential M&A multiple for Rasmala’s $1.2 billion AUM, which looks pretty reasonable]. However, CEO Zak Hydari (& HBG Holdings) still hold the driving seat & it remains unclear what the end-game might be here. Somers’ tender exit was also unwelcome…though I don’t think it should alarm investors. [They prefer active involvement in the management & strategy of their investee companies – presumably, that proved a non-runner here, so the tender was an opportunity to exit, rather than build a far larger holding & adopt a more aggressive stance]. Not to mention, the lack of post-tender Holding RNSs is puzzling, esp. from HBG Partners themselves (after confirming their participation in the tender).

All in all, Rasmala obviously remains an unloved & neglected stock – one with some lingering corporate governance concerns – but arguably it’s still worth at least 0.6-0.7 times book as things stand today. Realistically though, who knows if & when such a revaluation (& improved investor sentiment) might actually occur? Meanwhile, RMA has once again become an event-driven stock – noting it still boasts almost £80 million in balance sheet assets, I’m willing to bet on the probability of another tender offer (at a substantial share price premium) within the next 18 months.

[NB:Sale – in the footnotes of my last post, I noted a part sale, but let me formally confirm here a reduction in my Rasmala holding (via the tender offer) from 2.8% to 2.0% (as of year-end). This was more house-cleaning (than active selling), as I eliminated smaller RMA holdings in other accounts/family names – these would have potentially gamed tender offer terms, which can prove highly advantageous (but in the end proved irrelevant here).]

This was pretty unexpected…in fact, seeing the shares down (23)% last year was quite the disconnect vs. the underlying business itself, which boasted a huge turnaround in sales & profitability. Auction sales were actually up +31% in FY-2017 to €437 million, on higher pelt prices – for comparison, that’s similar to FY-2010. But despite more recent restructuring, expenses are still 25% higher today…fortunately offset by a steady increase in Saga Furs’ turnover (i.e. auction fees) ratio to 12.1% (vs. 10.2% in 2010, I’ve already highlighted this counter-cyclicalfeature of the business model), so last year’s EUR 2.05 EPS ended up much the same as 2010.

Now sure, that kind of round-trip volatility probably deserves a lower multiple, but does it really deserve a 7.2 P/E & a 6.8% dividend yield?! I think not… Not to mention, a sub-0.6 Price/Book multiple, despite an 8.0% return on equity. Granted, the company did offer a cautious outlook (but that’s par for the course), but for a luxury goods/auctioneering/emerging markets-focused company, those are still extraordinarily cheap multiples. [Noting in particular, underlying demand – annual pelt sales have been growing, slowly but steadily]. Unfortunately, the emergence of Chinese breeders in the last decade has exacerbated the normal wholesale volatility of the company’s business model. They focus predominantly on price, not quality, and obviously operate in an (animal welfare) regime which allows them to quickly enter/scale up/exit the industry pretty much at will. More than ever, the European fur industry must pursue the opposite strategy – i.e. like any luxury goods company, focus on quality & branding, not price – and step up its lobbying & marketing efforts (plus its commitment to animal welfare), to ensure the apparel/luxury industry & consumers appreciate/value the distinction (vs. Chinese fur).

Ultimately, I still believe Saga Furs is a cyclical growth company – in due course, I’d hope to see auction sales double again (and earnings triple) to reach/surpass the prior peak we saw in FY-2013 (& in FY-2006 before that). If I’m wrong: Well, again, it’s dirt cheap…the stock now trades on 1.0 times sales, even though it boasts an average 20%+ adjusted operating margin (operating profit plus financial income) over the last decade, and a sub-€1 million/(2.2)% adjusted operating loss in its worst-ever year. But if I’m right, what’s obviously a small & unique stock could quickly transform itself from neglected to multi-bagger status…

Shareholders regularly express their frustration to me, but I must say: Tetragon may actually be the perfect value stock! Seriously!? The problem with most value stocks is they’re essentially slow-motionevent-driven investments – management and/or the business clearly aren’t creating/compounding value, so what you’re really betting on is the potential closing* of a value gap…and your IRR gets worse & worse with every passing year. [*Since management’s almost inevitably part of the problem, this often requires external intervention – an acquirer, or shareholder activist – unfortunately, this occurs more rarely than we’d like to assume]. But with Tetragon, shareholders really don’t need to obsess over its massive & unjustified value gap (i.e. its NAV discount)…

Because management’s compounding value here: Tetragon’s return on equity was 9% last year & it’s averaged 12.4% pa since its 2007 IPO, it has a progressive dividend policy, it’s launched serial tender offers, and overall it’s returned a cumulative $1.2 billion (in dividends & share repurchases) to shareholders (since the IPO). [Last year’s return on equity was reflected in a +10% share price gain – which was more like a +16% return inc. dividends]. Notably, the dividend yield’s still almost 5.5%, enhanced by the opportunity to recycle it back into a cheap share price (via a DRIP). Not surprisingly, management eats their own cooking here – principals & employees now own 27% of Tetragon…which is pretty extraordinary for an investment company!

But regardless, Tetragon still sports a 37% NAV discount. Stripping out net cash, that widens to a 46% NAV discount. And topping that, if you strip out net cash & listed/liquid equities, you’re actually looking at an estimated/truly astonishing 58% NAV discount!?But again, after so long, I can’t tell you when & where this huge value gap finally gets closed/eliminated (as it deserves to be). But I can tell you management’s been working on it: They’ve commissioned investment research, made huge improvement in their IR communications, got out there & met investors in the UK/Ireland/N America, are planning a sterling TFG quote, etc.

But the TFG Asset Management unit may prove the real game-changer here – it’s grown spectacularly in the last 5 years, compounding almost 25% pa (mostly organically), with aggregate AUM tripling to $23 billion. Investor sentiment would likely improve dramatically if: i) in the wake of seeing 100+ new asset management opportunities last year, it can pull off a significant new acquisition (and/or launch a new asset class/platform*), and/or ii) it can ultimately spin itself out as a separate IPO/listing. [*More radically, a new cryptocurrency platform (for example) would add useful diversification & a dash of pixie-dust!? Less radically, spinning out Tetragon’s CLO/fixed income investments into a listed income fund might well eliminate the NAV discount for a significant % of the balance sheet]. But meanwhile, shareholders can afford to sit back, relax & enjoy the compounding…

Hang on, wasn’t Vietnam one of the world’s top-performingstock markets in 2017?! Yes, actually the VN-Index clocked a spectacular +48% return…so shareholders might be feeling hard done by here, with VOF shares racking up a mere +21% gain last year. Well, big picture, I think they should still be celebrating…

Don’t forget, I’ve always recommended VOF for its multi-asset portfolio* – which I believe is a superior approach in frontier markets – so it’s not surprising its performance trailed in a roaring bull market. [*With the virtual elimination of direct real estate, unlisted equities & P/E investments now make up about 30% of VOF’s portfolio]. Plus, last year’s sterling revival knocked back what was, in reality, a 32% return in dollar (& dong) terms. More importantly, VOF shareholders enjoyed a huge +70% windfall in 2016 – vs. an index which only gained +15% – on the back of portfolio out-performance, sterling weakness & NAV discount narrowing. Which puts VOF shareholders miles ahead of a 70% cumulative index gain in the last two years.

However, this now leaves the market on a trailing 20+ P/E, which obviously warrants some caution. That being said, it also reflects the fact that Vietnam’s enjoying a real Goldilocks economy here: GDP growth accelerated to 6.8% in 2017 (& similar growth’s expected this year) from 6.2%, but inflation actually declined significantly from 4.7% to 2.6%…while trade surpluses, FDI flows & a stable currency (for the past two & a half years now) all add to the favourable economic backdrop. Not to mention, consumer confidence hit all-time highs last year. The VOF team have also used last year’s rally, and the continued surge this year (fueled by overseas inflows) to actively recycle funds into new private equity investments (here’s their latest) & cheaper state-sponsored IPOs. Plus, VOF’s 17% NAV discount also remains pretty enticing here. All in all, Vietnam remains a compelling long-term ‘new China’ bet for me…

OK, that’s it for now!

Again, all comments/questions about these holdings are welcome here & by email. And also keep an eye out here for my next post, which will cover my five other/remaining disclosed portfolio holdings.

32 thoughts on “Wexboy Portfolio Prospects – Part I”

The key is to select quality businesses in growth sectors that can achieve growth over a 3-5 year period, ideally with some dividend income while that occurs. We like infrastructure, retirement, construction and pharmaceuticals that match well with a growing and aging population.

Sold Donegal in tranches around 9. Not with a lot of enthusiasm, i wanted to keep them, but unsure how it would be taxed in belgium firstly and second, not sure what would happen to the remaining shares. Anyway, thx a lot for the tip, it has been one of the best low risk ever. Since it was about 30% of my portfolio quite a lot of money (for me anyway, everything is relative) is on the sidelines looking to invest. I do like food related companies, so i ended up looking at total produce who have been executing nicely so it seems and were outsmarting greenyard foods in acquiring Dole. Any thoughts on it? Thx again and also for applegreen of course.

I agree Donegal is a low-risk economically insensitive special situation stock, one that regardless offered substantial upside potential, but still impressed you had the cojones to live with a 30% position in your portfolio! [I’d normally stop adding to a position at 7.5% of my portfolio, but might hold it well above & beyond that limit]. Glad it’s worked out so well for you!

DCP:ID share redemption is just a sale of part of your shareholding, so should NOT trigger any kind of income tax liability, but you may be liable to capital gains tax (on your gains vs. cost), but obviously I can’t offer a definitive answer for your situation.

As regards the outlook for Donegal shares, that will become far more dependent on having a specific/variant view of the intrinsic value of its businesses/the company itself. By which I mean: As DCP’s market cap gets much smaller again, any absolute variance in underlying intrinsic value vs. book value will be magnified in terms of NAV per share (& NAV enhancement, if additional sale proceeds are also applied to share buybacks). For example, I suspect the M&A value of Nomadic Dairy is significantly higher than its current book value – this value differential could be pretty meaningful to what will be a sub-40 million mkt cap company & likely explains why management’s obviously comfortable buying back shares at a premium to the current (under-) stated book value per share.

Not sure if you’re aware, but Total Produce was a nice-3/4 bagger for me & one of the first shares I covered here on the blog. But if you search back, you’ll note I was never all that impressed with management’s strategy, and particularly their capital allocation approach – so I don’t regret taking hefty profits on a deep value stock & reinvesting the proceeds elsewhere. I’ll admit they do appear to have upped their game & growth potential more recently…but obviously you’re more than paying for that in the current share price & valuation (vs. the sub-40 cent levels I enjoyed)!

Glad to hear you’re in Applegreen too – plenty of valuation upside here still at the current share price, and a huge potential growth runway ahead for management to execute on & exploit.

Hi, thanks for a great blog post. I am new reader and very interested to read you’re position in VOF.

I’ve been following the fund for some months now, but have been fairly skeptical to invest due to the very high cost of investing. Is it fairly unavoidable to pay these sorts fees for frontier economies like Vietnam? I read above that the ETFs have performed terribly. Do you think the benefit of being invested in a fund such as VOF outweighs the cost?

Having been to Vietnam a number of times in the past few years, its incredible to see the growth and potential the country has, therefore I’m desperate to have some exposure but being a young investor I’m very keen to keep costs to a minimum.

If you scroll down here, you’ll note I already left a fairly detailed reply for Tom re the listed Vietnam funds now available to investors – you should find it useful.

Yes, I agree Vietnam’s growth & investment potential are incredible – I call it the new China – esp. for (younger) investors with a long-term investment horizon, as I’m sure there’ll be plenty more volatility along the way! And the less developed the market (esp. a frontier market), the more opportunity for active managers to actually depart from (often inappropriate) benchmark indices (which ETFs are stuck with) & deliver significant alpha/greater diversification, while also hopefully avoiding complete disaster(s) – so yes, I believe paying a higher management fee & even a performance fee can be justified, vs. what you’d pay for an ETF (if there’s any available).

Listed investment companies also offer another potential performance advantage (vs. ETFs) for smart & somewhat contrarian investors – the opportunity to maybe buy at a significant NAV discount (when the fund/market is temporarily out-of-favour, or somewhat unknown to the average investor), and to ultimately sell at a much smaller discount or even an NAV premium – which can really magnify & enhance underlying market/fund returns!

If you’re keeping costs to a minimum, I presume you’ll want to use a discount/online broker to buy any of these funds, so one small note: Some discount/online brokers seem to have had an issue with dealing in London-listed shares which are quoted in dollars, so you may want to check that out. But as I’ve stated here, VOF:LN remains my core Vietnam exposure (& is quoted in sterling these days), so I would obviously recommend it as a first/primary buy…though I wouldn’t necessarily be averse to increasing my Vietnam exposure further via VEIL:LN, or VNH:LN.

Hi Wexboy
I see Record has taken a dive. They have reduce fees charged to client. The look to be losing client/investors. I have a small holding . I might stick it out another while to see were it goes. I see you have a bit invested here yourself.

But I view the recent passive hedging fee structure change as pretty much just that – i.e. a fee structure change – with management emphasising ‘we expect that these performance fees will more than offset the reduction in management fees over the longer-term’ (albeit, they also highlight a potential timing/transition risk). I actually see NO evidence they’re losing clients/AUME here, or that this fee change was somehow forced upon them:

i) Client numbers, Total AUME & Passive Hedging AUME are all at/near all-time highs & all have been growing steadily over the last year/3 years/5 years, and
ii) Passive fee rates have increased steadily since the financial crisis (in comparison to non-passive fee rate declines in the wake of the crisis).

This fee news (& any resulting/potential impact) could prove a near-term headwind, but longer-term I continue to judge Record & its progress based on two key metrics – Total AUME (in particular, Passive Hedging AUME growth) & number of customers – and see no reason they can’t maintain the impressive growth trajectory we’ve seen over the last 5 years.

it’s all good and well but one can also wonder if additional profits will accrue to employees or shareholders. That’s my main issue with many tech companies and another area where Apple stands out. You know with Apple that they will redistribute the cash to shareholders.

Last year, Record management did a £10 million return of capital & committed to paying out 100% of earnings in dividends…if that doesn’t persuade you, I’m not sure what will!

After all, these guys are owner-operators, with a controlling stake in the company – so they’re properly aligned/incentivised for long-term success alongside all shareholders, not least because they presumably recognise any attempt to milk the company (at the expense of other shareholders) would likely be offset by the fall in value of their stake. And big picture, this is a company & management that’s already proved 55-60%+ operating margins are actually possible – so while the performance fee regime here has changed drastically post-crisis, it does suggest shareholders can look forward to substantially higher operating margins* again, presuming continued AUME growth.

I’ve been reading your website for a while now,I like your approach to investment in that you like a good discount and it’s surprising how many companies are trading at a decent discount if you go out of the hot sectors or look at fallen stars.
I nearly bought Apple Green but was concerned about the demise of petrol and Diesel but I suppose fast chargers would give people more time to spend money.
My last purchase was ESP emperic student property,it has around a 20% discount to nav a decent dividend and some fantastic assets, LTV is low.The next results are this month so hopefully this will tell us more about where the company is heading.
I read about German property here a long time ago I didn’t buy Sirius but I did buy Phoenix spree although that has since been sold.
Keep up the good work.

Re Applegreen – as you say, charging may actually imply more valuable customers –
but big picture, take another look in the comments & replies section of my Applegreen post, I highlight some of the ‘math’ involved:

EVs are only 1-2% of NEW SALES right now, so it will obviously take many years for EVs to grow into a majority of new sales (& don’t forget they’ve actually been promising EV/alternative fuel cars since the ’80s!?). But even at that point, EVs will still be a relatively small % of the TOTAL car fleet on the road, and that will only change slowly as the average (petrol/diesel) car generally remains on the road for 15-20 years. Of course, like any retailer/company, Applegreen will evolve its business over the years too.

Yes, I’m always enthusiastic about student accommodation – I believe it’s more defensive/contra-cyclical than most other property out there in the event of an economic/property downturn, and will continue to benefit from the long term tailwind of helicopter parents & snowflake students who love high quality/custom-built/secure student accommodation! I also think Brexit will prove a red herring in terms of the UK’s foreign student population.

I still consider German property one of the best/most secure long-term assets around. The sector’s valuation obviously repriced in more recent years – so the NAV discount free lunch is basically gone*, but the underlying property upside potential remains. [*So it’s far more important to pick the right management team(s) now]. We seem to be nearing the end of the residential consolidation phase now, so I think the next big wave of investor interest will come as co’s migrate to more of a REIT/FFO/dividend-driven model.

I am still unsure (but am happy to be convinced) if VOF is the best pick in this space. I prefer VNH for the access to mid-cap stocks, and VEIL for access to turbo-charged large caps, and good access to IPOs at a similarly decent discount to VOF.

I appreciate that the P/E and unlisted element may come good – I guess I haven’t seen enough evidence to believe in the abilities of the managers.

That’s my slight issue with all 3 of these closed-end funds – apart from the eye-watering management fees, there is much less disclosure on portfolios than I’d like.

I saw that VOF has just gone into the FTSE250 and imagine that should be a good tonic for the shares.

To sum up, I don’t think VOF is terrible, and the top 10 holdings are fine, but I’m not convinced by the managers’ talent, and think there are better options available.

As of end-Dec, 2017, the VN-Index (in $ terms) rallied +118% over the last 5 years, but was actually down (25)% over the last 10 years. The latter return is deceptive though, as the underlying index return was marginally positive – with dong weakness (mainly in the years 2008-2010) being the actual culprit here. [And alas, end-Dec, 2007, isn’t a good base for any index!] For investors, there are five Vietnam funds to choose from – basically, these are the ONLY options:

In the medium term, VEIL was actually the best 3 & 5 year performer – notching up a near 200% return over 5 years.

[NB: But it’s important to note this out-performance is pretty academic for the average investor, as VEIL’s only been London-listed since Jul-2016].

While VOF & VNH turned out to be neck & neck, with an approx 20% performance gap in favour of VOF over 3 years & VNH over 5 years. I won’t even bother mentioning the two ETFs – it’s hard to believe they’re even invested in Vietnam, delivering (on average) just 25% of the VN-Index return over 5 years!?

[VNM’s performance is particularly egregious (it’s actually negative over 3 years!), considering how often it’s recommended as the one US-listed Vietnam fund for American investors to consider.]

But five years ago, we didn’t necessarily have any level of certainty the index would actually deliver a positive return, let alone a significant bull market. So we look back today & not surprisingly we see VEIL & VNH (more marginally) both out-performed VOF’s multi-asset portfolio during that 5 year bull market. But personally, I remain comfortable with the logic of my decision to choose VOF (over VEIL & VNH) as a slightly more defensive/appropriate fund for a frontier market – the index outcome & relative performances could obviously have been very different under an alternative scenario – in the end, I didn’t pick/achieve the actual best-performing fund, but I did match the index (and +118% is an excellent consolation prize!).

We see the logic of this better in their 10 year performance – while the investment companies all significantly outperformed the index (positive returns across the board), VOF was the clear leader of the pack, earning (on average) over double (at +61%) the other two funds. [Again, another pathetic ETF performance – only XVTD existed since Feb-2008…and it managed to lost almost two-thirds of its NAV since!?]

As regards fees, a 1.75-2.00% management fee (& an incentive fee) are not unusual for pioneering listed frontier market funds, and the investment managers have all proved themselves…wiping the floor with the ETFs, and also matching/beating the index (after all fees).

In closing, my VOF holding oscillates between 4-5% of my portfolio – it functions as a long-term default allocation to Vietnam. Given the right market scenario & valuation, and the level of risk elsewhere in my portfolio, I’m not averse to being more aggressive in my exposure – increasing it perhaps to 7.5%, or even 10% eventually – consistent with that logic, I’d consider buying VEIL (rather than VOF) if/when I want to increase my Vietnam exposure above 5%.

From my point of view, it almost hasn’t been worth comparing the funds against trackers, as the indices they follow have been so skewed by the Foreign Ownership Limits i.e. they haven’t been able to own certain stocks which they would normally be able to, otherwise their figures might have looked better.

That said, more recently this has changed with a) overall improved liquidity and b) things like the ridiculous case of Faros Construction, which is basically owned by the ETFs and Vietnamese punters.

Thinking again, I think all 3 of the funds should do well over the long-term if Vietnam does well, and I believe the country has lots to offer at the moment.

However there is an argument that many large-caps (and some of the recent IPOs) are quite expensive now and could correct.

For this reason, I still lean towards VNH as it is so much more mid-cap focused. Also the recent board shake-up will hopefully lead to some improvements.

But I do see that VOF has potential if they do some good work in the Unlisted & Private Equity side of things. I’m glad they’re out of the property as Vinaland didn’t really work (except as a discount play).

Anyway, it’s rare to come across people who invest in Vietnam, so cheers for the opportunity to comment. Good luck to you too!

Tom – you’re welcome – and it wouldn’t necessarily be wrong either to suggest owning ALL three investment companies – best of luck, Vietnam continues to look like a marvelous long-term play. Cheers, Wexboy

TGONF looks interesting and I am considering entering a long position. I love the dividend yield, ROE, discount to NAV, the impressive track record of the TFG Asset Management unit, and the fact that management owns a huge amount of shares. But, I am concerned because the P/E of other closed-end investment companies are about half of Tetragon’s, which is 11. These include: ADX: 4.1, TY: 6.1, GAB: 6.2, GAM: 5.7, and SMT: 4.6. These, along with concerns over the management team, make it difficult to estimate when the “value gap” will close.

I struggled for a minute to understand an investment company P/E…I guess you could calculate one based on its realised/unrealised gains plus dividend income earned less expenses (& taxes).

But please note it’s NOT a metric suitable for investment company analysis, as it simply measures return for the past year…and a single year isn’t meaningful/long enough for performance comparison. [5/10 year performance comparison might be useful, but P/Es are irrelevant to such an analysis]. And comparing dissimilar investment companies’ returns isn’t meaningful either – it’s just apples & oranges, with differing returns simply reflecting differing investment mandates. [e.g. TFG earned 9% in 2017 from a multi-sector/asset portfolio, while the investment companies you mention earned 19% (on average) from portfolios which presumably/generally track the S&P].

I am not so sure if TFG is a real compounder. The ROE looks acceptable as long as they buy back shares at a large discount. If you look at the monthly NAV development over 2017 the NAV increases by 1% from Jan. to Nov. (ignoring dividends) with the buyback effect in Dec. In 2016 the NAV actually declined until the buyback does the magic. Don’t get me wrong, the compounding is real, but if the stop buying shares for whatever reason the compounding stops.

Individual yearly results will obviously vary, I think it’s important to focus more on the longer-term trajectory here. And as things stand today – i.e. I’m no original bag-holder, I got to buy at a cheap price/massive discount! – fortunately, I’m not so bothered about the individual drivers* of Tetragon’s compounding.

After all, as an investment company, TFG management’s only job here is to allocate & compound capital – so if they can (also) do that via share buybacks, I’m perfectly comfortable with that! [Of course, that’s the job of all company management – e.g. Henry Singleton isn’t any less of a legend because much of his return was derived from (share) cannibalism!] But in the end, I think we’re very much on the same page – if management stopped doing periodic tender offers, my positive opinion on the biz/stock would probably change dramatically, regardless of the compounding impact.

Frankly, we need to see even more/larger buybacks & even more NAV enhancement here – management’s argument they need large amounts of cash on hand for upcoming investment commitments (& opportunities) is disingenuous at best, when you consider the cashflows being thrown off by their CLO portfolio & the liquidity they have available elsewhere in the overall portfolio!

Cheers,

Wexboy

*Cherry-picking is tempting, but can also be misleading – if you net off all the pluses & minuses in a portfolio, it’s amazing & alarming how often annual performance seems to boil down to a single great (or terrible) stock pick/two. Which can really mess with your head!

Stick to the facts, man. In reality, as I highlighted above, fur production/sales continue to grow, slowly but steadily – the main business risk Saga Furs (and Kopenhagen Fur –
between them they dominate fur auction sales globally) actually faces is fur price volatility, not demand. Which has been true for at least two decades now – the fur industry is actually booming, as I first noted/discussed in my original Saga Furs post:

At the end of the day, Saga Furs isn’t a fur producer or consumer. European producers are pretty short-sighted if they focus solely on quantity, vs. quality – they can’t hope to compete purely on price with Chinese producers. And consumers should also be less hypocritical about always demanding more for their dollar & then bemoaning the actual consequences (as any main/high street retailer will agree).

Saga Furs has actually agreed new protocol/standards with ProFur re blue fox skins. And more generally, I’m quite sure management recognises its own best long term interests here (i.e. higher European fur prices), and the contribution it can make to the industry & to its strategy/standards – again, as I stated above:

‘More than ever, the European fur industry must pursue the opposite strategy – i.e. like any luxury goods company, focus on quality & branding, not price – and step up its lobbying & marketing efforts (plus its commitment to animal welfare), to ensure the apparel/luxury industry & consumers appreciate/value the distinction (vs. Chinese fur).’

So the MORE animal welfare regulation we see, and the MORE actual industry & government enforcement of those regulations, the better I say for all concerned.

As for the Norway (& Poland) news, I think it’s best to wait & see what actually happens there. And ayway, it’s not unusual for specialised industries to migrate to a particular region/country, for a variety of reasons, so a further concentration of fur farming in Finland (for example) wouldn’t be at all surprising. Obviously the demand is there…so it would be silly to assume (European) supply somehow disappears as a result of evolving legislation in certain countries.

[And as for any actual existential risk Saga Furs might face, I’ve also written about that before: Based on the company’s ongoing earnings/dividends, the substantial gap between the current share price & book value (which I believe is fully realisable in a wind-down scenario), the likely implementation of transition periods/grandfathering clauses/a compensation regime/etc…I’d expect Saga Furs would turn out to be a decent investment regardless, even in such a (remote) scenario.]